Ch.5 BA218 Personal Finance

Overdraft protection plans prevent you from experiencing an insufficient funds, or overdraft, situation. In general, they do this by providing an inflow of money into your account that is at least sufficient to cover your: ___

Bad checks or similar withdrawals

Depository institutions include:

Commercial banks, savings banks, savings and loan associations (thrifts), and credit unions

There are three potential arrangements that may be used to provide overdraft protection to a checking account holder: an automatic funds transfer agreement, an automatic overdraft loan agreement, and courtesy, or opt-in," ovrdraft/bounce protection. How do they compare? The methods differ in the ___ used to remedy the insufficient funds situation. However, they are all similar in that each is ___ expensive than the practice of good checking account management.

Sources and costs More

If you walk by your financial institution and you see a sign on the door that is a circle and says "Federal Deposit" "Insurance Corporation" Are you walking into a depository or non-depository institution?

A depository institution

Savings accounts include statement savings accounts and certificates of deposit (CDs). If you wanted the flexibility to make additional deposits or frequent withdrawals once you opened the account, which type of account should you open?

A statement savings account

A variable-rate CD is characterized by an interest rate that ___ over the life of the investment, while a fixed-rate CD carries an interest rate that ___ during its life.

Can Change Is Unchanging

Time deposits differ from demand deposits in that the funds held in ___ deposits are available immediately upon your request, while funds held in ___ deposits are designed to be committed to the institution and unavailable for use by the account holder for an extended period of time.

Demand Time

What institutions are protected by the Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Share Insurance Fund (NCUSIF)? The FDIC oversees and manages an insurance fund, called the ___ , that protects deposits held in banks, savings, and mutual savings associations. In contrast, funds held in federally chartered credit unions are insured by the ___.

Deposit Insurance Fund NCUSIF

Consider each of the following statements and indicate whether it refers to a blank endorsement, a special endorsement, or a restrictive endorsement. 1. Uses the phrase "For deposit only" to restrict the use of the check to only depositing it; it cannot be cashed. 2. Creates a two-party check, which is more easily deposited than cashed. 3. When endorsed in this manner, the check becomes a bearer instrument. 4. Contains only the payee's signature, so that the check is transformed into a bearer instrument. 5. This endorsement authorizes the financial institution to deposit the check only—not cash it. 6. Uses the phrase "Pay to the order of [name]" along with the payee's signature.

1. Restrictive Endorsement 2. Special Endorsement 3. Blank Endorsement 4. Blank Endorsement 5. Restrictive Endorsement 6. Special Endorsement

Read the following statements and classify each as to whether it applies to a statement savings account, a certificate of deposit, or both. 1. The account has no fixed maturity or end; if you maintain the minimum required balance in the account and the institution does not cease doing business, the account could earn interest over your entire lifetime. 2. The account often earns a higher interest rate than the rate earned on NOW and share draft accounts. 3. The interest rate can be either fixed or variable over the life of the account. 4 The account offers you greater flexibility with regard to the frequency and number of deposits and withdrawals. 5. If you withdraw your funds prior to the account's specified maturity, it is possible to end up with less money than you originally deposited. 6. You collect your earned interest and the original deposit at the end of the saving period. 7. You may make multiple deposits and withdrawals from the account and are given printed receipts to document these transactions. 8. The account is protected by the FDIC's or NCUSIF's deposit insurance program if held in an insured depository institution. 9. If funds are withdrawn before the end of a specified time period, you will incur an interest penalty ranging from thee months' to six months' worth of interest. 10. The account is often accessible using an ATM.

1. Statement Savings Account 2. BOTH SSA and Certificate of Deposit 3. CoD 4. SSA 5. CoD 6. CoD 7. SSA 8. BOTH CoD and SSA 9. CoD 10. SSA

A lost check with a ___ endorsement can be cashed by anyone who finds it.

Blank

"Wow, my grandmother really came through this year! Look at the great check she sent me! I've got to get this into my bank account, but the bank closes in two hours, and I'm having a big party at my house tonight. What do you think I should do?" What advice would you give Ethan?

Go to the bank now to deposit the check, and sign it using a restrictive endorsement when you get there.

This fee is levied when accounts remain idle, with no deposits or withdrawals, for specified periods such as six months or a year. It is usually referred to as an ___ fee.

Inactive Account

Your personal liability for the misuse of a lost debit card will be limited to $50 if you notify the issuing bank within: ___

2 days after losing the card

What does it mean to pay yourself first? It means making your saving activities your first priority by "paying" yourself, or making contributions to your savings accounts ___ you pay any other obligations.

Before

Read each of the following statements and indicate which type of plastic monetary management device is being described. Note: The same card can sometimes perform several functions, so think about the general type of card being described—not what you use your own card for. 1. ___ encrypts the amount of money stored on the card and can be reloaded by the card owner. 2. ___ allows you to access your accounts via an automated teller machine. 3. ___ is reloadable and is used to pay government benefits to recipients.

1. A Stored-value Card 2. An ATM Card 3. An Electronic Benefit Transfer Card

Thinking about the characteristics of fixed- and variable-rate CDs from the perspective of a saver, complete the following statements. 1. An important characteristic of a fixed-rate CD is the ___ of its interest rate, which allows the saver to accurately anticipate his or her expected earned interest income. 2. An important characteristic of a variable-rate CD, on the other hand, is its interest rate's ability to keep pace with changes in ___

1. Constancy 2. Other Market Interest Rates

What is the purpose of an emergency living expense savings fund, and what other sources of funds are used to address these needs? 1. To accumulate the funds that allow you to cover the following household costs: ___ 2. However, most people don't maintain an emergency living expense savings fund; instead, they expect to rely on ___ to pay their living expenses during these expensive and stressful events. The downside, or negative consequences, of this strategy is that it reduces, rather than increases, their wealth as it involves the payment, rather than receiving, of ___

1. Living expenses in the event of a job layoff, illness, injury, or the premature death of an income-generating member of the household 2. Their Credit Cards ; Interest

What are two sources of federal regulations that provide guidelines for the use of ATM and debit cards? 1. The sources of federal regulations that affect the use of electronic monetary management payment media are: ___ 2. The devices used in electronic money management, and addressed by these regulations, include: ___

1. The Electronic Funds Transfer Act and the Federal Reserve Board's Regulation E 2. ATMs and Debit Cards

Just as depository institutions differ from non-depository institutions, there are also differences between the structure and activities of, and the financial products and services provided by, various depository institutions. Read the following statements and indicate which, if any, are true. Check all that apply. A. Compared with commercial banks and savings banks, credit unions tend to pay the highest interest rates on their deposits. B. Demand deposit accounts created by commercial banks are usually called checking accounts or negotiable order of withdrawal (NOW) accounts, while those created by credit unions are called share draft accounts. C. All four types of institutions—commercial banks, savings and loan associations, credit unions, and mutual savings banks—pay the same rate of interest. D. The primary business focus of savings and loan associations is collecting funds by accepting deposits and making residential and consumer loans. E. Not all savings banks are mutual savings banks. Some exhibit a mutual structure, while others are organized as corporations. F. Members of both credit unions and mutual savings banks share a common bond or affiliation.

A, B, C, D, E

Which of the following practices would help you keep accurate records regarding the funds in your bank account? Check all that apply. A. Review and reconcile your bank statement each month B. Don't bother to keep track of your account; the bank will notify you if your account is short of funds C. Immediately record the date and amount of each transaction in your check register and calculate the new balance

A, C

Scenario: You are 26 years old, married, and have two small children. You have a household income (take-home pay) of $3,500 per month and currently rent your home. You have and pay many bills, and make many purchases (usually by debit card) each month. You often lose track of spending and end up paying unnecessary bank fees. You would like to buy a new car in five months and a new home in two years. To avoid overdrafts, you chose "opt-in" overdraft protection with your bank. You just received your bank statement, which states a balance of $691, while your check register says you have a balance of $800. A. Satisfying your day-to-day spending needs? B. Making and holding funds for your car purchase? C. Making and holding funds for your home purchase? D. Making and holding funds for your retirement?

A. NOW Account B. Statement Savings Account C. Certificate of Deposit D. Mutual Funds

Knowledge of the key safeguards provided by these regulations can often protect you against unexpected and substantial losses on your accounts. Let's discuss these protections further. Read the following statements and determine which, if any, are required by federal and state regulations with regard to lost or stolen debit cards. Check all that apply. A. A customer is responsible for any unauthorized withdrawals if their card is lost or stolen, regardless of how quickly they report the lost card. B. A customer may be liable for a $50 loss due to unauthorized withdrawals if their card is lost or stolen and the customer reports the loss to the financial institution within two business days. C. A customer is never liable for unauthorized withdrawals if their card is lost or stolen.

B

To settle a disagreement that they had last night, José and Brooke called you. José argued that FDIC and NCUSIF deposit insurance will cover mutual fund investments as well as insurance policies in the event the firms fail. Brooke argued that the programs would not protect these assets. Who is right: Jose or Brooke?

Brooke

Which of the following accounts is typically not insured? A. NOW Account B. Certificate of Deposit C. Mutual Funds D. Statement Savings Account

C

Would you expect an uninsured investment certificate to pay a higher or lower interest rate than a CD that is protected by deposit insurance and why? Assuming that everything else is equal: 1. the uninsured investment certificate should pay a ___ interest rate than an otherwise equal and insured CD; and this relationship should exist because the uninsured investment certificate exposes the saver to a ___ risk of loss, in the event that the issuing firm fails.

Higher ; Greater

Natalia currently holds a checking account balance of $125 in the commercial bank down the street. She is the only owner of the account. If the bank failed this afternoon, the maximum amount of coverage that would be provided by the Deposit Insurance Fund is $125. This statement is ___

True

You can avoid a service fee on an average-balance account if you: ___

Keep a certain average daily balance in the account through a specified time

What are the implications of the characteristics of a fixed-rate CD for a saver?

On the positive side, this means that savers will know in advance how much interest income they will earn, but on the negative side, savers will earn less interest income if interest rates increase while their funds are invested.

What is electronic cash management? 1. Cash management activities that are undertaken without the use of paper documents are called ___ , which includes the use of both plastic and electronic payment media. 2. Underlying these transactions are ___ (EFTs) in which funds and information are shifted electronically between the accounts of individuals and institutions. These EFTs are used whenever cash or check transactions are not conducted.

1. Electronic money or cash management 2. Electronic Funds Transfers (EFT)

What are the different form and products of non-depository institutions? If you wanted to purchase ownership interests in diversified portfolios of investments, which type of financial product provider should you contact?

A mutual fund

How are payments made using each of the three payment systems? The paper system involves the use of ___ , while the plastic-based system uses ___. The electronic system employs computers and similar devices to access bank accounts.

Cash and Checks ; Credit, Debit, and Stored-value Cards

Lastly, how will the presence or absence of deposit insurance on your deposits affect your wealth? Madison received an inheritance from her grandmother last month. This boosted the normal balance of her savings account to its current balance of $378,500. She is the sole owner of the account. The maximum amount of coverage that would be provided by the Deposit Insurance Fund is: ___

$250,000

What are the different forms and products of non-depository institutions? If you wanted to purchase investment advice, as well as stocks, bonds, and other investments, which type of non-depository institution should you contact?

A stock brokerage firm

This saving strategy has the following advantage: ___

It ensures that funds will be saved—as opposed to saving only if sufficient funds remain after all other bills are paid and any impulse purchases are made. Therefore, paying yourself first imposes FINANCIAL DISCIPLINE on the act of saving.

In addition to obtaining CDs from commercial banks, savings associations, and credit unions, you can obtain them from your stockbroker. These investments, which tend to pay higher interest rates than those available in banks, are called ___ CDs.

Non-brokered

Consider the plastic-based payment system and its different media. There are seven general types of media, each with different features and risks. What are they? *Stored-value Cards *___ cards * Credit Cards *Prepaid Cards *___ Cards *Electronic Benefit Transfer Cards *Key Fobs/Smartcards

Debit ; ATM

Last week, Ethan's brother said that FDIC or NCUSIF deposit insurance on Ethan's account covers the funds on deposit, but not his accrued interest. Ethan's brother's information is ___

Incorrect

If you walk by your financial institution and you see a sign on the door that is a circle and says "NCUA" The National Credit Union Administration (NCUA) administers and manages the: ___

National Credit Union Share Insurance Fund (NCUSIF)

If you intend to deposit funds into your bank account, it is best to use a __ endorsement

Restrictive

Read each of the following statements, and indicate which overdraft protection arrangement is being described . 1. This program frequently necessitates transfers of fixed increments (e.g., $100) and may result in greater-than-desired transfers and resulting interest charges. This describes: ___ 2. This program often requires the account holder to open and maintain a line of credit or a bank-issued credit card, and incur interest charges and annual fees or cash-advance fees on the sources of transferred funds. This describes: ___ 3. This program could still result in an overdraft if the account holder's savings account does not have sufficient funds to cover the overdraft. This describes: ___ 4. Involves an automatic loan from the bank to the account holder in the amount of the insufficient check—without notifying the account holder, and the account holder's payment of a large flat NSF fee and the repayment of the borrowed funds, usually in less than a month. This describes: ___ 5. This program incurs a relatively lower cost since it utilizes the account holder's own funds and merely necessitates a transfer fee. This describes: ___. 6. This program can quickly spiral into a very expensive incident because the bank typically does not notify the account holder of the overdraft condition or the imposition of any NSF fees. This describes: ___

1. An automatic overdraft loan agreement 2. An automatic overdraft loan agreement 3. An automatic funds transfer agreement 4. A courtesy overdraft/bounce protection 5. An automatic funds transfer agreement 6. A courtesy overdraft/bounce protection

How do depository institutions differ from non-depository institutions? Depository institutions are required to ___ and ___ , although the general terms used to describe these financial products may vary across the various types of institutions. Non-depository institutions, in contrast, accept cash contributions from their customers, but the cash inflows are not called ___ ; instead, they are called shares or premiums

Accept deposits Make loans Deposits